OPEC is sitting pretty

By Money Matters Editors

For OPEC, it’s the best of times.

OPEC, meeting in Angola, said they don’t plan to reduce production despite bountiful supplies, Bloomberg News reported Monday.

The reason? Oil prices are so advantages – oil closed Monday at $72.47 per barrel – that the group does not have to take action even though demand is modest and supplies are at 1-year and in some cases at 3-year highs in key developed world markets.

What’s keeping oil’s price so high? Well, part of it is the expectation that global economic growth – in particular, emerging market demand – will eventually place pressure on global oil supplies in a year or so. But perhaps the biggest factor in oil’s unusually high price despite sluggish demand is the weak dollar. Depending on the model one uses, the weak dollar has added $10-25 to oil’s price.

At it’s put OPEC in a nice spot. Despite sluggish demand, OPEC does not have to cut production to maintain a high price: it’s already high. Oil’s price is all the more remarkable after one considers that many group members are ‘cheating’ on their production quota – they’re pumping more than their daily quota to take advantage of oil’s high price – and the price of oil still hasn’t moved much lower.

Further, the above speaks to the U.S.’s need to cut its budget deficit – a major factor in the dollar’s slide – as soon as possible. The sooner Congress does, the sooner the U.S. and the world will recapture that extra $10-25 that’s been lost due to the cheaper buck. (For U.S. motorists, that translates into an extra 25-65 cents per gallon of gasoline – solely due to the weaker dollar: it’s not an insignificant amount of money, from a consumer spending standpoint.)

Until that time, OPEC can sit by leisurely and collect a massive amount of revenue, despite the worst global oil demand conditions in a decade. Talk about sitting pretty.